After seeing all those Bentleys, Ferraris, and Aston Martins in Chicago, I had an urge to go car shopping. Of course, no bank in their right mind would lend me money for such craziness, but it led me to wonder, how do you put a ceiling on car spending? Obviously it is related to your income, but I didn’t know what other factors were involved. So…time for the search.

The good ol’ friendly and efficient (ahem) Department of Motor Vehicles has a nice how-to for creating a car budget. This was good, but not what I wanted exactly. A guide on MSN autos provides some useful guidelines on figuring out how much to spend and what should be an expected ceiling. The usual tips about controlling impulse buying and getting good prices are in there, but the bit I was looking for was this:

Determining Your Debt-to-Income Ratio

* Add up all your monthly installment payments such as car payments and credit card payments (do not include regular living expenses like rent, mortgage, or utilities).
* Divide the total by your monthly take-home pay, after taxes and other withholdings have been subtracted.
* The resulting percentage is your debt-to-income ratio.

The Consumer Credit Counseling Service (CCCS) recommends keeping your debt-to-income ratio below 15 percent. If your figuring shows a ratio already higher than that, CCCS recommends that you shouldn’t attempt car payments at all until you pay off at least some of your credit bills.

If your ratio is lower than 20 percent, a lender probably will grant you a car loan, but you should do more figuring to determine if you really can afford it.

That seems pretty logical to me. Take what you’re spending, add on the expected car payment, and find your ratio. Conversely, you can do some algebra and solve for the highest car payment amount that will keep your ratio around 15%. For example, for the 2002 Aston Martin DB7 I want ($70,000), I would have to make around $350,000 a year (assuming you spend 15-20%).

This is not to say, don’t go for it if it’s your dream and hobby. But this simple guideline should be a big deciding factor for you when you go car shopping. A big car payment will take a huge chunk out of your funds every month; make sure you can deal without that chunk. Like anything else, this is just a best practice suggestion; evaluate and use accordingly. Aston Martin, here I come.

How Much Should You Spend? from MSN Autos and How to Create a Car Budget from DMV.org